Veeva Systems Inc. (VEEV 2.21%), a cloud-based software company which specifically caters to pharmaceutical and life science companies, has had a fairly volatile ride since its public debut in October.
Although Veeva is still up 64% from its IPO price of $20, investors who purchased shares on the first day of trading have watched their shares fall 12%.
Should investors expect Veeva to recover in 2014, or will it continue slipping away?
Source: Ycharts.
Veeva was founded by Peter Gassner, the former Senior Vice President of Technology at cloud computing giant Salesforce (CRM 3.10%), and Matt Wallach, the former General Manager of the Pharmaceuticals and Biotechnology division of Siebel Systems, now a subsidiary of Oracle (ORCL +4.68%). Veeva is still partnered with Salesforce, and uses Salesforce's SFA (Sales Force Automation tools) as the foundation of its business.
Gassner and Wallach are trying to become the Salesforce of health care by offering cloud-based tools to the drug market to help track prescribing habits and comply with new health care industry regulations. The company also intends to improve customer relationships through cloud-based CRM (customer relationship management) software.
Electronic prescriptions, along with electronic health records (EHRs) and electronic medical records (EMRs), are considered essential requirements of the U.S. HITECH Act, which requires physicians to meet certain "meaningful use" requirements to qualify for government incentives.
As a result, the health care market will become more interconnected digitally -- a trend that Veeva intends to profit from. So far, Veeva's plan has been working. The company has reported that 33 of the 50 largest pharmaceutical and biotech companies, including Pfizer and Amgen, are among its customers. Veeva caters to approximately 170 customers in 75 countries.
What Veeva offers its customers
Veeva's iRep, its flagship service, stores customer feedback and collected data on a single system, reducing the administrative burden to a company. It also allows sales representatives to use FaceTime on an Apple iPad for face-to-face conversations with customers.
Meanwhile, Veeva's Vault service helps pharmaceutical companies store their research and development, clinical trials, and quality control data in the cloud. The Veeva Network, which was introduced in October, combines health care professional, health care organization, and affiliations data with a customer master application. This master application replaces multiple or redundant records for a single customer with a single view of the customer.
Veeva released its first public earnings report in early December, and the numbers were impressive -- third quarter revenue rose 54% year-over-year to $55.0 million, with the key revenue driver being subscription revenues from SFA, which surged 95% to $38.5 million. Veeva's net income climbed 13% to $6.5 million, or $0.05 per share.
Although Veeva's top and bottom line growth were impressive, the stock has fallen 20% since its earnings report. There are two main concerns about the company -- its valuation and the size of its potential market.
Veeva's valuation problem
Veeva lists Oracle, EMC (EMC +0.00%), and even Microsoft (MSFT +0.66%) among its chief competitors, but it is actually a much smaller company with much higher valuations.
|
Market Cap |
Trailing P/E |
5-year PEG ratio |
Price-to-sales (ttm) |
Price-to-book (mrq) | |
|
Veeva |
$4.1 billion |
205.7 |
5.46 |
22.4 |
15.5 |
|
Oracle |
$166.1 billion |
15.7 |
1.16 |
4.4 |
3.8 |
|
EMC |
$51.6 billion |
20.1 |
1.16 |
2.2 |
2.3 |
|
Microsoft |
$305.7 billion |
13.7 |
1.92 |
3.8 |
3.8 |
Source: Yahoo Finance, as of Dec. 24.
Two numbers are particularly troubling for Veeva -- its whopping P/E ratio of 205.7, which strongly indicates that the stock is overvalued at current prices, and its PEG ratio of 5.46, which suggests sluggish bottom line growth ahead over the next five years. Simply put, Veeva simply doesn't look like it has the growth to justify its steep valuations.
In addition, Oracle, EMC, and Microsoft currently offer a wider variety of cloud-based solutions than Veeva by directly targeting hospitals, patients, and the underlying digital foundations of their EHR and EMR systems.
Veeva, on the other hand, relies heavily on its established relationships with pharmaceutical companies.
Veeva's saturation problem
That leads to the problem of market saturation. Veeva really only has two true direct competitors -- Cegedim, a French company, and Oracle's Siebel division. Cegedim is the current market leader, with a 33% market share in life sciences CRM. Veeva is currently in second place with 30%, while Oracle is in third with a 14% share.
The big issue is that Cegedim, Veeva, and Oracle rely on a shared pool of sales representatives from global pharmaceutical companies. Unfortunately, that pool is getting smaller -- according to Cegedim's annual industry audits, the total number of sales representatives declined 1.8% year-over-year to 413,565 in 2011, and fell another 2.5% in 2012 to 403,225 sales representatives. Many of those cuts were due to biotech and pharmaceutical companies facing pipeline failures, restructuring, and patent cliffs.
This could become a major problem for Veeva, since the company values its core SFA business at over $2 billion, based on the calculation that 450,000 sales reps would each generate $4,500 in annual revenue. If Cegedim's audit is accurate, Veeva is actually competing against Cegedim and Oracle for a shrinking customer base that is actually 10% smaller than its original projection.
In addition, much of Veeva's past revenue growth was based on gaining new customers. But now that it has already won over huge players like Pfizer and Amgen, does Veeva still have that much more room to grow?
The Foolish takeaway
In closing, Veeva is an interesting company to watch, since it is specifically using cloud-based software to improve the efficiency of life science companies. However, it's a tough stock to recommend -- the stock's valuations are simply too high and its core customer pool of pharmaceutical sales reps is steadily shrinking.
Investors interested in cloud-based software in health care might want to instead consider Athenahealth or Cerner, which both focus on broader cloud-based solutions for patients and doctors. Neither stock is dependent on pharmaceutical sales reps, and both are in favor due to medical practices upgrading their systems to meet meaningful use requirements.
